If one trusts the language of a draft statement by France's ruling Socialist Party for presentation to a party conference in June, the country is heading for a showdown with Germany in general and Chancellor Angela Merkel in particular over Euro zone budget consolidation policy, austerity.

But after one of those brief, nine-hour meetings lasting to 1 a.m., which clearly showed how expeditiously a well-run party deals with these little local difficulties, the offensive language about Chancellor Merkel's "intransigent selfishness" was deleted from the draft, which had been leaked to the Paris press.

The revised draft (still awaiting final approval) makes this a policy issue, not a personal one, and it is about the policies of Europe's conservatives, which, echoing Le Monde, said the statement -

"have already made things worse: free trade as a horizon for external relations, austerity as the standard within our frontiers."

Follow up:

The statement clearly reflects the protectionist reflexes and anti-globalisation sentiments of the leftists in the Socialist Party and parties further to the left, which, oddly enough, lines them all up with the far-right National Front under the leadership of Marie LePen, which says simply that France should leave the Euro system.

Generation with No History

One is left with the impression of a history-less generation to which it has never occurred that the early success and prosperity of the European Union was founded on a policy of breaking down trade barriers, "free trade" in fact. As for Bretton Woods and all that, that's pre-history.

The showdown, however, appears to be less a showdown with Germany than between the warring factions within the Socialist Party, a face-off between the the moderate, strongly pro-European President Francois Hollande, who accepts the need for budget consolidation, but argues for a less severe and abrupt approach and a -

"reorientation of policy towards growth and solidarity".

Le Monde's front-page editorial on April 27 summed up the lessons of the draft statement:

"Either the bellicose language was approved from on high, which is worrying; or it was not, which is also worrying. The reality is that the Socialist Party is in the process of imploding over the government's economic policy."

If Le Monde's conclusion is right, the president could find himself in serious trouble, perhaps facing a situation in the not too distant future in which his government cannot find a majority for its policies in the National Assembly.

Covert Attack

This might arise when the government is forced to meet commitments to the European Commission to reduce government spending and will be urged to raise the standard retirement age, cut social welfare benefits, and loosen up the country's exceptionally rigid labour laws.

In essence, the anti-German aggression in the draft statement was a not-so-covert attack by left wingers on the "conservative" policy of the Socialist Party's own government, who want to abandon austerity and switch to a policy of spurring growth by borrowing lots more and spending it on public investment projects.

Instead of €60bn in cuts in public spending promised by the government, three left wing members of the party, one a member of the European Parliament the two others local government politicians, intend to present a plan for a €44bn "national loan" to finance more high speed rail track, more high speed data transmission cable, to rescue the French auto industry by giving it bags of cash to subsidise production of electric cars, and more.

If they have realised that by becoming a member of the single currency Euro zone France has given up its monetary sovereignty and does not have a central bank that can print as much money as the government can spend, they have yet to draw the conclusion that their alternative policy requires that France leaves the Euro zone.

Europe's Biggest Borrower

In other words it is in the same position as states of the United States, that do not have the option of pursuing their own state-wide Keynesian fiscal expansion policy, or the option of an exchange rate devaluation to boost export competitiveness.

The difference is that the US federal government does have the fiscal option, but Europe, without a federal government, does not.

What's more, the left-wingers are pushing their alternative policy in a year when France will be the biggest issuer of government debt in Europe with a huge roll-over requirement peaking in the autumn, as Alain Juppé, veteran of the conservative opposition UMP, prime minister for a period under President Chirac and foreign minister under Nicolas Sarkozy, has pointed out. He told Le Monde -

"If we don't do something to reduce our debt, interest rates will rise and we shall lose all room for manœuvre."

However, to date, the quarrelling in the Socialist Party has not reached this stage. The government had no difficulty in April finding a majority to back its commitment to the European Commission to reduce its budget deficit to 3.8 % of GDP this year and 2.9 % in 2014.

Unemployment They Key

But meeting these commitments is going to be quite tough, probably leaving France with, at best, no change in real GDP this year or, more likely, some contraction, and a very modest return to growth in 2014.

Above all, under these conditions it will be nigh on impossible to stop the steady rise in unemployment, and disillusion of the left with President Hollande is closely linked to his inability to keep his presidential campaign promises to reduce unemployment.

The number of unemployed job seekers in the first quarter of this year rose to a record 3.2m. Unless the rate slackens from now on, it could pass 3.5m by the end of the year.

The fourth quarter headline unemployment number for metropolitan France was 10.2 %. It will be close to 10.5 % when the new quarterly figure is published. Eurostat's February figure for unemployment in France, including its overseas departments, was 10.8 % and is set to pass 11 % within another month or two.

There are two possible outcomes to the rebellion in the Socialist Party. The first is that Francois Hollande restores discipline in the party with some plain speaking about the unreality of the left wing dreamers' alternative to deficit reduction. Let's call it the optimists' call.

Pessimists and Super Pessimists

The pessimists see a situation in which there is a rebellion that leads to a government defeat in the National Assembly, which would seem to leave Hollande with no alternative but to call a general election.

What the outcome of that would be is anyone's guess, for the UMP (Union pour une Movement Populaire) is bitterly divided following a fraud-marked election for the presidency of the party.

The top job is claimed by both Jean-Francois Copé, a former budget minister, judged by Sarkozy as too ambitious to merit a job in his government, and Francois Fillon, Sarkozy's prime minister for five years. As a result, the UMP is gaining little or no traction in the opinion polls despite the unpopularity of Francois Hollande and his government.

And then there are the super pessimists who think that what happens in France does not matter much because the German Constitutional Court will follow the Bundesbank's opinion that the European Central Bank's Outright Monetary Transactions (OMT) programme is unconstitutional.

The OMT gives the bank a role as lender of last resort and has calmed markets since Mario Draghi announced it last autumn, but it has already been hobbled by a Constitutional Court ruling that OMT loans can only be given on condition that the recipient country implements reforms to the economy.

If that were indeed to be the court's verdict, the future of the Euro system itself would be in very serious doubt.

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